Yen falls to four-month low after Japan scraps negative interest rates

SINGAPORE (ICIS)–The Japanese yen (Y) fell to a four-month low on Wednesday despite the decision by the Bank of Japan (BoJ) to end its long-standing negative interest rate policy.

The weakening of the currency would be beneficial for exports but would translate to higher import costs.

At 04:10 GMT, the yen weakened to Y151.41 to the US dollar, the lowest so far this year, after falling by more than 1% on 19 March, compared with Y140.82 on 1 January this year.

While the BoJ’s move away from negative rates might seem hawkish, the central bank made it clear that this is a one-off move in the near term, stating that it “anticipates to maintain accommodative financial conditions for the time being.”

“The market probably expects that the central bank would move at a glacial pace, which must be disappointing – especially with the Fed’s [US Federal Reserve] move likely to be smaller than expected,” Dutch banking and financial services firm ING said in a note.

At its 18-19 March monetary policy meeting, Japan’s central bank ended its negative interest rate policy (NIRP) and scrapped the yield curve control (YCC) program, largely in line with market expectations.

In 2023, the Japanese yen slumped by around 11% against the US dollar, posting its biggest decline among other major currencies, as the BoJ maintained its key interest rate at minus 0.1%, while others, led by the US, had had aggressively tightened monetary policy to temper strong inflationary pressures.

The yen’s weakness pushed up Japan’s exports to a record high last year, but the country registered its third consecutive year of a trade deficit at Y9.29tr as import costs surged.

Exports remained on an upward trend this year, rising by 11.2% year on year in January on the back of improved shipments of vehicles and auto parts, while imports fell by 9.6% amid declining energy prices and weaker demand.

A weaker yen also gives Japanese chemical exports a price advantage overseas, but it also cuts into profit margins by raising the cost of imported energy needed for production.

The country’s total chemical exports remained in the negative for most of 2023 on sluggish global demand but has made a recovered since December, with January 2024 data showing a 11.2% year-on-year increase in shipments abroad.

Naphtha is the primary feedstock for Japanese refiners and petrochemical producers is. Around half of their naphtha requirements is imported, with the rest coming from domestic crude oil distillation units.

Japan’s overall naphtha imports totalled 25m kilolitres in 2023, while imports stood at 13.2m kilolitres, according to data from the Ministry of Economy, Trade and Industry (METI).

Summary of the BoJ’s new monetary policy framework

1. The BoJ will restore the uncollateralised overnight call rate as a primary policy tool and set the rate in a range between 0% to 0.1%, from -0.1% previously.
2. A continuation of its Japanese government bonds (JGBs) purchases with broadly the same as before – currently about Y6 trillion a month.
3. The central bank will discontinue the purchase of exchange-trade funds (ETFs)/J-REITs while gradually reducing the amount of purchase of CP and corporate bonds. It will discontinue the purchases in about a year. Japan’s REITs, also known as J-REITs, are publicly traded real estate investment trusts.
4. The BoJ has also opted to change its terms and rates for lending facilities.